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The Drug Pipeline Flows Again Tachi Yamada wrote up the ultimate Rx for GlaxoSmithKline: Making entrepreneurs out of 15,000 scientists.

By Kevin Kelleher

April 1, 2004

(Business 2.0) – January 2000 still seemed like a blue-sky dream for most of the business world. But a dark cloud had already settled over the heads of Tachi Yamada and Jean-Pierre Garnier, two top executives at SmithKline Beecham, the world's ninth-largest pharmaceutical firm. Product pipelines were running on empty. Patents for top-selling drugs, like SmithKline's Paxil, would soon expire. Worse for Yamada and Garnier, SmithKline was about to merge with another pharmaceutical giant--$14 billion Glaxo Wellcome--reeling from the same problems.

Garnier had already been tapped as CEO of GlaxoSmithKline, now the world's No. 2 drugmaker. But 58-year-old Yamada, SmithKline's research chief, got the tougher assignment: remaking the 15,000-worker R&D operations of both companies and turning a product pipeline trickle into a long-term gusher. "We can't keep doing what we're doing," Garnier warned Yamada. "So start thinking about something radical."

He did--and four years after Yamada led one of the most drastic restructurings ever at a drug firm, GlaxoSmithKline's R&D chairman is turning skeptics into believers and offering the strongest case yet that the company has found a cure for the pipeline drought that afflicts the industry. Last year Glaxo advanced 44 drugs into phase 2 and 3 human clinical trials--nearly double the company's output in 2001, when Yamada started his job.

So what radical ideas turned things around? Yamada did exactly what you wouldn't do after a merger that created a $35 billion behemoth. Instead of consolidating operations to slash costs, he broke a sprawling R&D organization into a cluster of independent startup labs. Instead of streamlining decision-making at the top, he pushed executive-level decisions down. The result: Today, Glaxo is sitting on more than 20 potential new blockbusters. "The answer to the pipeline problem is to be big and small at the same time," Yamada says. "You need people who think like entrepreneurs and play the hunches. That's what the industry lost when it got too big."

The Industry's Bitter Pill

Blockbuster drugs like Prozac and Viagra in the 1990s gave drugmakers a spectacular run of revenue and profit. Consolidation mergers--38 since 1994--helped fuel the growth. But the truth was, product innovation at Glaxo, Smith, and others was slowing down--just as technology was promising to speed it up.

First came "combinatorial chemistry," in which machines performed a type of chemical matchmaking that generated new drug leads at an unprecedented pace. Then came the decoding of the human genome, which linked a gene or series of genes to specific functions or afflictions, from asthma to Alzheimer's. Researchers saw the number of genetic "targets" jump from about 500 in the 1990s to several thousand today.

Pharmaceutical labs had fantastic tools to generate new leads, but as Yamada noticed as SmithKline's research chief, they ran into the pipeline's biggest clog: overlapping R&D fiefdoms inept at pushing drug candidates through the crucial stages between scientific discovery and human testing.

Correctly calling which prospects to pursue or dump makes a huge difference to the bottom line. New drugs cost an average of $800 million in investment and 10 years of testing by the time they get a stamp of approval from the U.S. Food and Drug Administration. And those processes don't scale; throwing more scientists at a compound doesn't ensure it'll ever earn a penny. Says Kenneth Kaitin, director of Tufts University's Center for the Study of Drug Development, "The problem is, decision-making on which drug leads to bring to trials is no better than it was before." The number of new federally approved drugs has dropped from 53 in 1996 to just 21 in 2003.

Yamada's innovation was to strip product-development authority from line managers and return it to scientists in the labs. Obvious as that sounds, it poses great risks in the drug business, where centrally managed R&D keeps costs down during a slowdown, and where companies have found it easier to acquire a smaller company's pipeline than to fix their own. But Yamada insisted that a dramatic overhaul of Glaxo's combined R&D staff was the only option. "Everything else was negotiable," Yamada says, "but not this."

Glaxo's Solution: Get Small

First on Yamada's agenda was the breakup of central R&D into six smaller labs structured like biotechs: Each would focus on a logical area of research--cancer, heart disease, and so on--and get its own chief executive, staff, and budget. The idea was to make each lab the bridge between scientific discovery and the clinical testing. At the Glaxo and SmithKline predecessor companies, groups responsible for spotting drug candidates merely "threw compounds over the fence," Yamada says. They worked separately from those that had to push the drugs into trials. Assigning teams to do it all themselves, he says, "concentrates the mind on making products."

Yamada also let each lab chief decide which of thousands of compounds to fast-track, another split from industry convention. He capped headcount at 400 per lab--small enough, Yamada says, so everyone could know nearly everyone else by name. To drive the centers into action, Yamada offered bonuses and royalties to researchers who advanced a drug into clinical testing.

R&D managers seemed to go along with the plan at first. But once the immense task of reassigning jobs, changing lines of authority, and setting up the centers got under way in early 2001, chaos threatened to bring it down. Dozens of top scientists bolted for other companies, and at least three high-level research executives quit the company. Yamada says, "There were some knock-down battles. This whole thing could have failed."

For two years, it did: In 2001, only six Glaxo drugs reached phase 2 research, and the new labs hadn't stepped up production. Meanwhile, the stock was taking a beating, sinking from $56.90 to $45.62. "Twenty-three months into this," Yamada says, "we still didn't have a proof-of-concept model."

He did have an advantage most managers don't: a boss who shared the risk. Garnier agreed to protect Yamada's job for three years, provided he delivered specific gains in output. And, eventually, the pipeline began to fill. Last year Glaxo advanced 15 drugs into phase 2 research, a 150 percent jump from 2001; drugs entering phase 1 doubled from 10 to 20. And Garnier has promised to file a record number of early-stage prospects between now and 2008. Those numbers made a believer of Allen Oliff, a former Merck scientist now running Glaxo's new cancer research lab in Pennsylvania. "Most reorganizations will only give you a 10 percent boost in productivity," he says. "And that's if you're lucky."

Ultimate proof is still a ways off. The company got only one drug past the FDA in 2003, and none of the top prospects will hit the market before 2005. But Yamada has always preferred the long view. In his suburban Philadelphia office, he speaks in slow cadences, as if what he says is much more important than how fast he says it. "I'm very comfortable taking risks," he intones. Even if Glaxo's top prospects don't all break $1 billion, he knows that his own big idea got past human testing.